Mises on the State Theory of Money (1912)

In his path-breaking book The Theory of Money and Credit (1912) the Austrian economist Ludwig von Mises (1881-1973) contrasts two very different ways by which money gets its value - either by “the command of the state”, or “on the estimation of commerce”:

Another acatallactic doctrine seeks to explain the value of money by the command of the state. According to this theory the value of money rests on the authority of the highest civil power, not on the estimation of commerce. The law commands, the subject obeys. This doctrine can in no way be fitted into a theory of exchange; for apparently it would have a meaning only if the state fixed the actual level of the money prices of all economic goods and services as by means of general price regulation. Since this cannot be asserted to be the case, the state theory of money is obliged to limit itself to the thesis that the state command establishes only the Geltung or validity of the money in nominal units, but not the validity of these nominal units in commerce.

According to the naivest and most primitive of the acatallactic doctrines, the value of money coincides with the value of the monetary material. But to attempt to go farther and begin to inquire into the grounds of the value of the precious metals, is already to have arrived at the construction of a catallactic system. The explanation of the value of goods is sought either in their utility or in the difficulty of obtaining them. In either case, the starting point has been discovered for a theory of the value of money also. Thus this naive approach, logically developed, conducts us automatically to the real problems. It is acatallactic, but it leads to catallactics.

Another acatallactic doctrine seeks to explain the value of money by the command of the state. According to this theory the value of money rests on the authority of the highest civil power, not on the estimation of commerce. The law commands, the subject obeys. This doctrine can in no way be fitted into a theory of exchange; for apparently it would have a meaning only if the state fixed the actual level of the money prices of all economic goods and services as by means of general price regulation. Since this cannot be asserted to be the case, the state theory of money is obliged to limit itself to the thesis that the state command establishes only the Geltung or validity of the money in nominal units, but not the validity of these nominal units in commerce. But this limitation amounts to abandonment of the attempt to explain the problem of money. By stressing the contrast between valor impositus and bonitas intrinseca, the canonists did indeed make it possible for scholastic sophistry to reconcile the Roman-canonist legal system with the facts of economic life. But at the same time they revealed the intrinsic futility of the doctrine of valor impositus; they demonstrated the impossibility of explaining the processes of the market with its assistance.

Nevertheless the nominalistic doctrine did not disappear from monetary literature. The princes of the time, who saw in the debasement of money an important means of improving their financial position, needed the justification of this theory, If, in its endeavors to construct a complete theory of the human economy, the struggling science of economics kept itself free from nominalism, there were nevertheless always enough nominalists for fiscal needs. At the beginning of the nineteenth century, nominalism still had representatives in Gentz and Adam Müller, writing in support of the Austrian monetary policy of the Bankozettel period. And nominalism was used as a foundation for the demands of the inflationists. But it was to experience its full renascence in the German “realistic” economics of the twentieth century.

About this Quotation:

Mises path-breaking book The Theory of Money and Credit was first published in German 100 years ago in 1912. It became a foundation stone in the emerging “Austrian” theory of money and later to the Austrian Theory of the Trade Cycle which was developed by Mises, Friedrich Hayek and others. Mises’ innovation in “Money and Credit” was to apply the subjectivist theory of value and price to money and banking which led to a number of important insights such as the fact that money emerges spontaneously out of economic activity without any need for intervention by the state. In an Appendix to the book Mises devotes a short essay to the historical view which he opposed, namely “The State Theory of Money”, from which this quotation comes. Much of what Mises wrote in 1912 was prescient in a way he could not have conceived of at the time. He was about to live through one of the greatest inflationary periods in history brought about by the massive debts and expenditures caused by the demands of fighting the World War and the crude attempts to pay off these debts after the conflict ended by dramatically expanding the supply of money, especially in Weimar Germany in 1923. Mises played an important policy role in Austria during this period thus adding practical experience to his deep theoretical insights.